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July 27, 2021
This is how Facebook kills its competition

Premarket stocks: Big Tech’s dominance is under threat. Do investors care?

What’s happening: Dozens of states and the US government sued Facebook (FB) on Wednesday in twin antitrust lawsuits, alleging that the social media giant has abused its dominance in the digital marketplace and engaged in anticompetitive behavior.

It’s a direct challenge to one of Silicon Valley’s most powerful corporations. And it could have major consequences, given the focus on Facebook’s acquisitions of Instagram and WhatsApp. Though the court battle is likely to play out over a period of years, a breakup of the company is on the cards.

The action is part of a broader rise in regulatory pressure. In October, the US Justice Department and 11 states filed a landmark lawsuit against Google (GOOGL), alleging that it had stifled competition to maintain its leadership in online search and search advertising. Experts say the challenges are the biggest antitrust suits since the US government took on Microsoft in the late 1990s and early 2000s.
And European regulators, which have long used aggressive investigations and huge fines to police the biggest tech firms, are expected to present sweeping new rules to curb the power of Google, Apple, Amazon and Facebook next week.

But for now, the market obsession with high-growth tech companies — which has driven the Nasdaq Composite up nearly 38% this year — shows no sign of fading.

Take the IPOs of DoorDash and Airbnb this week. Food delivery service DoorDash, which priced its stock above expectations at $102, saw shares skyrocket 86% to almost $190 in their first day of trading on the New York Stock Exchange on Wednesday.
Airbnb also announced that it will also price its stock above the expected range at $68 per share. That translates to a valuation of roughly $47 billion despite the pandemic. Shares hit the Nasdaq on Thursday.

“The market is not valuation sensitive right now,” David Erickson, a finance professor at the University of Pennsylvania’s Wharton School, told me.

Given the low interest rate environment, investors are flocking to stocks — and they see fast-growing tech firms generating high returns as the place to be, added Erickson, who previously worked as co-head of global equity capital markets at Barclays.

Even Facebook’s stock looks fairly teflon, despite the growing risks to its business. Shares fell 2% on Wednesday, and are off 1% in premarket trading.

“We believe a breakup is unlikely [and] see this as a buying opportunity,” JPMorgan analyst Doug Anmuth said in a note to clients.

Wall Street likes what Starbucks is selling

It may seem like there’s already a Starbucks on every corner. But the company is planning to add tens of thousands of locations in the coming decade as it prepares for a post-pandemic world, my CNN Business colleague Danielle Wiener-Bronner reports.

Starbucks (SBUX) said at an investor event Wednesday that it plans to increase its store count to about 55,000 by 2030, up from roughly 33,000 today.

The company is betting that by flooding the market with new types of stores, including smaller locations and ones with drive-thru and curbside pickup, it will be able to steal more customers from the competition.

“Though we are growing off a large base, there is ample room to expand in regions where the Starbucks brand is less penetrated,” said Roz Brewer, the company’s chief operating officer.

New formats will also help reduce congestion in city locations, boosting sales there, she added.

The company has been struggling to regain the business lost due to Covid-19, which has disrupted commuting routines as many office employees work from home. Globally, sales at Starbucks stores open for at least 13 months fell 9% in the three months that ended on Sept. 27, compared to the same period last year.

But Wall Street seems confident in the company’s way forward. Starbucks also intends to rely more on technology, after having successfully used loyalty programs to learn more about their customers and spur repeat purchases.

Investor insight: Starbucks shares hit an all-time high last Friday, and are up more than 3% in premarket trading Thursday. Maybe investors like the expansion plans — or maybe they’re just excited for a national rollout of the company’s oat milk.

China’s state-owned firms are in trouble. It’s a global problem

Chinese state-owned companies are starting to default on their debts. That could ripple through the country’s financial system, threatening to slam the brakes on the nation’s economy and hobble the global recovery from the pandemic, my CNN Business colleague Laura He reports.

State firms defaulted on a record 40 billion yuan ($6.1 billion) worth of bonds between January and October, according to Fitch Ratings. That’s about as much as the last two years combined.

The problem has only gotten worse in recent weeks. A slew of major companies — including BMW’s Chinese partner Brilliance Auto Group, top smartphone chip maker Tsinghua Unigroup, and Yongcheng Coal and Electricity — declared bankruptcy or defaulted on their loans, sending shock waves through the nation’s debt market.

Bond prices have plummeted and interest rates have spiked. The turmoil has even spilled over into the stock market, where shares of state-owned firms have been sinking.

Big picture: The success of the state sector, which has historically been considered a safe bet, is critical to China’s financial system. While such firms contribute less than a third of GDP, they account for more than half of the bank loans offered in China and some 90% of the country’s corporate bonds.

Issues here could ultimately drag down the country’s fragile recovery. And given that China is the only major economy forecast to grow this year, and is expected to help drive next year’s rebound, they should be a global concern.

Up next

The European Central Bank makes its latest policy announcement, followed by a press conference with President Christine Lagarde.

Also today:

  • Costco (COST), Lululemon (LULU) and Oracle (ORCL) report results after US markets close.
  • Initial applications for unemployment benefits for last week post at 8:30 a.m. ET. Economists surveyed by Refinitiv expect an additional 725,000 claims, a slight increase from the previous week.

Coming next: UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen have given negotiators until Sunday to reach a Brexit trade agreement. Is there room for a deal?